Friday, 5 October 2012

"Big Bang Reform"

India recently enacted policies to allow overseas investors to hold a larger stake in companies in various industries including airlines, insurance, retail and consumer. This news caused the rupee to cross a five-month high and the benchmark Sensex to rise 1%, as markets received a glimpse of the policy reform they have been seeking. The Department of Industrial Policy and Promotion (DIPP) stated that India received FDI of approximately US$1.33 billion this May. This makes the cumulative FDI inflows for the months April-May 2012 US$ 3.18 billion. Keeping with its reformatory trend, the government stated that it would sell 10% of its stake in Oil India, 12.5% of its stake in Nalco, an aluminum maker. This push towards privatization will likely be seen as a positive one by foreign institutional investors.

The services industry received the majority of the April-May inflows followed by the pharmaceutical, metallurgical, construction, housing and power industries. The retail and consumer industries, however, have been the ones subject to the most controversy in the midst of the inflows. This is because India’s economy constitutes millions of small shopkeepers and farmers, and most neighborhoods are used to local “sabzi-walas” (vegetable sellers) and retailers of such sort. A decision to allow huge retailers such as Wal-Mart and IKEA threatens the livelihoods of these small businesses and could cause drastic changes to India’s economy. Although the Prime minister, Manmohan Singh, says its time for “big bang reform,” the policies have so far caused a big backlash from local politicians who believe the entrance of these giants will hurt India’s economy. Mr. Balpit Punj, spokesman for the Bharatiya Janata Party (one of India’s two major political parties) stated the party is completely against the changes and will do everything in their power to stop them. However, others including Indian billionaire Vijay Mallya, have been pushing the government to attract greater foreign direct investment. The influx of foreign capital could directly benefit Mr. Mallya’s airline Kingfisher, which has been the subject of mass strikes, negative income and is in desperate need of capital injection.

In my opinion, attracting foreign direct investment is a necessary step for India’s future economic development. Hopefully, the influx of capital through industry will have a positive impact on India’s infrastructure and contribute to its future development.